Summary:
Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention.
It warns that the rise of Germany's AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE, stimulus that has already been pocketed and spent in advance by the markets.
It will force Angela Merkel to take a tougher line on Europe, and further complicates the management of the (already dysfunctional) currency bloc.
The rating agency said it will henceforth monitor any sign that Germany is digging in its heels on EMU matters as it seeks to head off this rising political threat. The report is written by Moritz Kraemer, head of sovereign ratings in Europe. He is German. This is not an Anglo-Saxon analysis.
Alternative für Deutschland is blowing across Germany like a tornado. The party won 12.6pc in Brandenburg and 10.6pc in Thuringia a week ago, following its success in Saxony. It has now broken into three regional parliaments. The free market FDP is being systematically destroyed. Now AfD is ripping into the Left-wing base of Die Linke as well.
They have seven seats in the European Parliament. We saw potent effects of that yesterday as party leader Bernd Lucke personally grilled the ECB’s Mario Draghi at a session of the economic and monetary affairs committee.

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Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention.
It warns that the rise of Germany's AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE, stimulus that has already been pocketed and spent in advance by the markets.
It will force Angela Merkel to take a tougher line on Europe, and further complicates the management of the (already dysfunctional) currency bloc.
The rating agency said it will henceforth monitor any sign that Germany is digging in its heels on EMU matters as it seeks to head off this rising political threat. The report is written by Moritz Kraemer, head of sovereign ratings in Europe. He is German. This is not an Anglo-Saxon analysis.
Alternative für Deutschland is blowing across Germany like a tornado. The party won 12.6pc in Brandenburg and 10.6pc in Thuringia a week ago, following its success in Saxony. It has now broken into three regional parliaments. The free market FDP is being systematically destroyed. Now AfD is ripping into the Left-wing base of Die Linke as well.
They have seven seats in the European Parliament. We saw potent effects of that yesterday as party leader Bernd Lucke personally grilled the ECB’s Mario Draghi at a session of the economic and monetary affairs committee.
He specifically attacked ECB plans for asset purchases, insisting that there is already more than enough liquidity in the financial system to head off deflation. QE-lite is merely a way to shift credit risk from the high-debt states to the creditor core (a quasi fiscal policy that circumvents the sovereign prerogatives of the Bundestag), he said, and it will not work anyway. “You are saddling up the wrong horse because you don’t have another one in the stable,” he said.
Mr Lucke is a professor of economics at Hamburg University, a specialist on the real business cycle model. His right-hand man is Hans-Olaf Henkel, former head of the Federation of German Industry and a financial columnist for Handelsblatt. These are serious men. Attempts to dismiss them as fringe romantics, and lately far-Right rabble-rousers, are unlikely to work. AfD has for the first time given disaffected Germans a way to protest without stigma.
Here are a few extracts from the S&P report:

As the largest euro area government and the benchmark safe-haven issuer, Germany's role in the joint crisis management has been critical. The relatively strong domestic political position of the German federal government facilitated the necessary compromises.
Until recently, no openly Eurosceptic party in Germany has been able to galvanise the opponents of European "bail-outs", and of German taxpayers assuming contingent financial risks. But this comfortable position now appears to have come to an end.
AfD has presented a party program, appears to enjoy a disciplined leadership, and is a well-funded party appealing to conservatives more broadly, beyond its europhobe core and roots. Most political analysts agree that the ascent of AfD is unlikely to be a short-term phenomenon. It could also have repercussions beyond German politics.
This shift in the partisan landscape could have implications for euro area policies by diminishing the German government's room for manoeuvre. Chancellor Angela Merkel and her conservative CDU
have long benefited from the absence of a viable opposition to its right. This has allowed it to move deeply into the centre of the political spectrum.
Should AfD's popularity persist in the polls, we would expect the CDU to attempt to reoccupy the political space it had previously abandoned. Accordingly, we would envisage a rising probability of the CDU's (and hence Germany's) policy stance hardening toward euro area compromises. This could include less flexibility in easing the pace of fiscal adjustment of other European sovereigns, or resistance toward a coordinated pan-European investment plan that some European governments are aiming for. It could also lead to more openly critical rhetoric against the ECB's policies, which would further complicate unconventional monetary policy.
None of this would matter much, if we were to assess that the euro crisis is safely behind us. However, this is unlikely to be the case. Eurozone output is still below 2007 levels and in 2014 the
weak recovery has come to a near halt in much of the euro area. Unemployment remains precariously high and disinflationary pressures have been mounting. Public debt burdens continue to rise in all large euro area countries bar Germany.
We will monitor any signs of Germany hardening its stance. Such a shift could diminish the confidence of financial investors in the robustness of multilateral support upon which any eurozone sovereign could draw, should it be required. Such a change in sentiment could contribute toward less benign sovereign funding conditions for lower-rated euro area sovereigns compared to the historically low interest rates on sovereign bonds that we observe today.

S&P also warned that a forthcoming judgment by the European Court on the ECB’s backstop plan for Italy and Spain (OMT) might queer the pitch yet further.
The German Verfassungsgericht has already ruled that the OMT “manifestly violates” the EU Treaties and is probably “Ultra Vires”, meaning that the Bundesbank may not legally take part. The European Court can hardly ignore this if it values its own survival. (Just to clarify, the German court does not defer to the ECJ as a superior court. It reserves the sovereign right to strike down anything the EU institutions do, pointedly reminding overzealous officials that the member countries are the “Masters of the Treaties”, and not the other way round)
David Marsh from the monetary forum OMFIF – and author of books on both the Bundesbank and the euro – says there cannot be any serious QE in these circumstances. “QE is just not on the table. It is a red herring,” he said.
I agree entirely with S&P’s analysis, and I also note a stark divergence in market perceptions between German experts (or those who read German and follow Germany closely) and the Anglo-Saxon/global fraternity. Americans in particular seem to view the ECB as the counterpart of the Federal Reserve, responding to normal economic signals. It is nothing of the kind. The ECB is a political animal. It cannot stray far from German political consent, or at least it cannot do so safely.
It is already clear that Germany will drag its feet on the ECB’s plans for private bond purchases (ABS, RMBS, covered bonds) for months. Berlin/Frankfurt will seek to ensure that it does not add up to much – at least until Germany itself gets into trouble.
Bundesbank chief Jens Weidmann said this week that the ECB’s plan to buy securities shifts the risk to taxpayers from banks. It is “doubtful” whether there are enough high-quality assets available to make much difference in any case, he said.
Yes, Mr Weidmann was overruled on the OMT in August 2012 but that was an entirely different episode. Germany was not overruled. The German finance ministry helped create the OMT, as the lesser evil at a moment when Italy and Spain were flying out of control.
This time Berlin is closer to the Bundesbank. Finance Minister Wolfgang Schäuble has been shooting down every proposal for reflation, warning at the G20 that there are already bubbles forming in the equity and property markets.
We are back to the core problem that bedevilled the eurozone through its three near-death experiences – May 2012, November 2011, and July 2012 – which is how far the German body politic is willing to go to shore up monetary union when push comes to shove.
This issue has never been resolved. At each stage Germany has agreed to do just enough to keep EMU going, always at the twelfth hour, without ever going far enough to put the currency union on a workable footing (Very difficult in my view, though that won’t stop EU leaders persisting until victims take matters into their own hands).
Whatever window of opportunity may have existed when Angela Merkel faced no coherent Eurosceptic opposition has now passed irreversibly. If and when the next shock hits, Prof Lucke’s AfD will standing across her path with bayonets, not pitchforks.

Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels.